After making KFCs a common sight in big Indian cities Yum Brands is now targeting second-tier markets as it looks to ring up $1 billion in system sales and 1,000 stores by 2015.

Niren Chaudhary, president of Yum’s India operations, said the company, whose other chains include Pizza Hut and Taco Bell, is counting on a new wave of growth in India propelled by favorable demographics.

“By 2030, India will be the largest consuming class in the world, ahead of the U.S. and China,” Mr. Chaudhary said in a recent interview. India’s young population with a median age of 28 is another attractive market feature, he said. “The demographic dividend India has is unquestionable,” he said.

Yum has been in India since the early 1990s and has gained scale in big cities like Delhi, Bangalore and Mumbai. In its year-end financial report on Feb. 4, the company said it ended 2012 with 593 KFCs and Pizza Huts in India – many in crowded city markets, airports and shopping malls. India system sales (the total of Yum and its franchise partners) grew 29% over the previous year, with same-store sales growth of 5%.

Mr. Chaudhary said Yum could invest $100 million over the next three to four years adding new stores in small towns like Baroda in the state of Gujarat. “The model is strongest in the emerging towns – that’s where the bulk of our development is going to be,” Mr. Chaudhary said. “Our game plan is to get into as many of those towns as early as possible.”

The company is seeing dual benefits in small markets like Coimbatore and Visakhapatnam where it has already launched KFCs, he says. “We get a top line similar to big cities at rentals which are much more affordable.”

India’s roughly $350 million in annual system sales makes up just 3% of global sales for Yum. But one sign of the nation’s growing importance is that it is one of only three countries reported as a separate “division” in Yum’s financial results, along with China and the U.S.

China has been the major Asian growth engine for Yum in recent years. But the Chinese government’s investigation into antibiotics use in KFC’s poultry, and the resulting media coverage, has taken a major toll lately, with a same-store sales decline in China of 25% in January and February combined.

India’s restaurant industry is expected to grow from about $14 billion in annual revenues in 2012 to $26 billion in 2015, according to Franchise India, an industry group. Nearly two-thirds of Indians now eat out at least once a week, the group’s data shows.

There’s still plenty of room for growth, as 70% of the market is made up of small mom-and-pop stores rather than restaurant chains. Still, restaurants face the same massive regulatory constraints that all Indian retailers do – an array of licenses need to be secured and renewed regularly, and supplying fresh ingredients quickly on India’s ramshackle road infrastructure can be tough.

KFC’s menu in India has some of the old standards familiar in the U.S. – buckets of fried chicken drumsticks and boneless strips. There are tweaks, of course, for the local market, like the vegetarian chickpea patty sandwich and hot wings with chili lemon sprinkles. “It gives it a bit more of a kick than other international markets,” Mr. Chaudhary says.

Yum is still in the early stages of rolling out Taco Bell in India. There are a handful of stores in Bangalore, with more planned. Mexican food has yet to really catch fire in India, despite – or perhaps because of – the similarities in ingredients like tortillas and red beans to their Indian counterparts. Mr. Chaudhary said people are sometimes turned off because they’re expecting an Indian taste out of food that looks somewhat Indian.

The company is experimenting with fusion concepts like the “Kathitto” – a cross of the burrito and the Indian kathi roll. “When a consumer sees this, he says, ‘Yeah, I know what to do with this food,” Mr. Chaudhary says.

“I believe this is a dream opportunity,” Mr. Chaudhary said of the growth potential in India. “We’ve reached a point of inflection and are beginning to accelerate.”

Amol Sharma is an India Correspondent for The Wall Street Journal. Follow him and India Real Time on Twitter @amolsharmawsj and @indiarealtime.

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